Global Oil Prices Won’t Drop Until 2023, Cost of Living to Continue Rising

Despite the recent reduction in petrol prices in Kenya on October 14, the fuel price nightmare for motorists could worsen further as global oil prices continue to rise.

According to the latest Commodity Markets Outlook report released over the weekend by the World Bank, the recent surge in oil price is unlikely to reverse until 2023.

The average crude prices are expected to close the year at $70 a barrel, 70 percent higher than in 2020.

This recent run-up in global oil prices could threaten economic growth and will, in turn, push up other energy prices like natural gas, the report said.

“The surge in energy prices poses significant near-term risks to global inflation and, if sustained, could also weigh on growth in energy-importing countries,” Ayhan Kose, the  World Bank chief economist stated.

The increases have been “more pronounced than previously projected” and “may complicate policy choices as countries recover from last year’s global recession”.

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The past few weeks have seen oil prices surge over $80 a barrel. This represents one of the highest points in years.

As economies reopen following the pandemic shutdowns, the trend could cripple struggling economies amid shipping bottlenecks.

The World Bank uses an average of Brent, West Texas Intermediate, and Dubai which it said will “remain at high levels in 2022 but will start to decline in the second half of the year as supply constraints ease”.

The 2022 average is projected to rise to $74 before falling to $65 in 2023. However, the report warns that “additional price spikes may occur in the near-term amid very low inventories and persistent supply bottlenecks”.

This continued rebound in global oil prices beckons heightened risks of imported inflationary pressure on the price of commodities for the Kenyan consumer.

Already, the existing fuel prices, despite the recent reductions, have had a significant knock-on effect on the cost of living and running a business in Kenya.

The effect will be more pronounced if the prices continue rising and could further worsen the final price of all goods and services.

The economy uses diesel for electricity generation, meaning that higher prices of the fuel will automatically result in higher fuel cost charges on power bills.

Manufacturers are likely to factor in the higher costs of power resulting from the global oil price fluctuation.

This is on top of the direct increase in cost for the majority of households who rely on kerosene and LPG for lighting and cooking, making crude price a key determinant of the rate of inflation.

Given that the economy is still reeling from the effect of the covid-19 pandemic, any additional cost of fuel and of doing business cannot be favorable.

Food costs are already elevated in the country. By the end of September 2021, the inflation rate as measured by the Consumer Price Index (CPI) was 6.91 percent compared to 6.57 percent in August 2021.

This was mainly driven by a rise in prices of commodities under food and non-alcoholic beverages (10.63 percent); transport (9.21 percent); and housing, water, electricity, gas, and other fuels (6.08 percent) between September 2020 and September 2021.

A higher petroleum import bill will also have a direct impact on the shilling’s exchange rate due to a higher demand for dollars by oil marketers.

Petroleum imports account for 18 percent of the country’s monthly import bill and are the second largest category of imports after industrial goods.